Some invaders will slash prices to slice off chunks of your market
 

'Historically, 90% of foreign companies entering a new market have competed on price.'
-
Nicholas Hall, BMW

PRICE isn't all-important. According to conventional business wisdom, it's quality that counts. That and service. But don't bet on it - not when you're preparing to defend your market territory against foreign incursions.

Obviously, not all sectors of the economy will face the same degree of price-cutting by invaders. Some may not face it at all.

One sector that will is the ...


MOTOR INDUSTRY

Taking a short-term view, the Delta Motor Corporation, which assembles Opel cars, Isuzu commercial vehicles and distributes the Suzuki range of leisure vehicles, believes invaders can only compete on the base of price in an over- saturated market.

Rodney Rudman, strategy manager for passenger vehicles, cites the Hyundai as an example. Assembled in Botswana, it retails for 15% to 20% below the price for other comparable, locally assembled vehicles.

He contends that the price differential compensates for the lack of service and product support.

As the import duty begins to drop, the market will open up to any vehicle manufacturer who doesn't already have a presence in South Africa. Most will opt to import completely built-up units to avoid massive investment in plant for local assembly. Volvo, of Sweden, has already chosen this route. Rumours indicate Peugeot and Citroen, of France, may follow suit.

A plethora of new foreign competitors will play havoc with motor industry pricing structures. They'll force local manufacturers to import completely built up units themselves to remain competitive.

Dropping prices will exert a downward pressure on vehicle retail prices lower down the product line. And as retail prices slide, manufacturers will have to address the issue of reduced profitability. While this won't have a dramatic impact on top-of-the-range cars, where substantial profit margins are built in, it will affect base-line vehicles.

So price wars are inevitable as local manufacturers prepare to defend their markets against price-cutting invaders.

Or are they?


To price cut, or not to price cut?

The Delta Motor Corporation won't engage in a price war even if invaders slash prices in an attempt to gain market share. It will instead concentrate on increasing the value added component of its product line.

Nissan takes a short to medium-term view, during which punitive import duties will make the importation of low priced, high-quality completely built-up units impossible.

But if it does come to a battle, Nissan isn't scared of becoming embroiled in a price war.

'We'll fight fire with fire,' says national sales director Lester Miller.

David Pfaff, who wears the Fiat Uno hat at Nissan, disagrees. Fiat Uno will not get involved in a price war, he states.

He argues that short-term gains in sales are no substitute for greater profitability. Although foreign competitors may gain market share by cutting prices, it's a strategy they won't be able to sustain.

Low prices may initially attract purchasers, but Pfaff maintains that long-term customer loyalty depends on an efficient dealer network with well-trained personnel.

'This is the area where cut-price upstarts, such as Hyundai, will ultimately fail in the long run.'

Samcor, which assembles Ford, Mazda and Mitsubishi vehicles at plants in Pretoria and Port Elizabeth, views price-cutting - dumping in particular - as a major threat to the South African motor industry.

State-imposed protection, in terms of the new GATT arrangement, will no longer shield local assembly plants from offshore competitors.

Pointing to Hyundai as an example, managing director Arthur Mutlow says these vehicles don't attract import duty because they come into the country as allegedly 'manufactured in South Africa'. In fact, they come in as almost fully built cars. The only missing components are bumpers and wheels.


HOW GATT WILL IMPACT ON THE MOTOR INDUSTRY

South Africa has agreed to conform to the Uruguay round  of GATT. For the motor industry, this means that import tariffs will be reduced from the current rate of 115% to 45% by the year 2002.

A Motor Industry Task Force has formulated a plan called Phase VII to co-ordinate the deregulation process. This will allow the industry to restructure to minimise the impact on profitability and employment levels.
 

But Samcor's marketing research manager, vehicle marketing, Mike Ewing, expects the price of Hyundais to double in the near future when the government closes the loophole that the Korean manufacturers found in the web of protective import legislation.

He doesn't expect an influx of low-priced imports to play havoc with the South African motor industry's price structure in the short term. His reason: still-in-place punitive import duties make imports more expensive than locally manufactured products.

But how will the local motor industry fare if the government accelerates import tariff reductions?

Dereck Smith, also of Samcor, doesn't mince words. 'The price of overseas products along with their quality will blow domestic companies away.'


The cost advantage route

BMW's Nicholas Hall puts it another way.  'The most obvious and expected route that foreign competitors will use when entering and penetrating the South African market will be via cost advantages.'

They'll achieve these by importing vehicles instead of setting up local plants. Deregulation makes this more viable because the biggest investment is in the product itself.

Hall warns that local vehicle manufacturers are not really equipped to defend themselves effectively against offshore competitors who use this 'cost advantage strategy'.

The upshot could be that manufacturers close local assembly plants and import fully built vehicles to exploit the strategy.


Local content woes for the 'heavies'

Pricing is also a major concern in the commercial vehicle sector of the South African motor industry.

At the heart of the problem: the local content programme and small production runs, which make local manufacture less efficient than it is in Europe, the United States and Pacific Rim countries.

Local manufacturers have been at a cost disadvantage, which has created a pathway into the local market for the more cost-efficient producers. The 'get in' strategies of these new players has been based on price.

Economies of scale overseas lead to the production of vehicles there at a lower per unit cost. If foreign manufacturers export fully built vehicles to South Africa, they won't have to bear the cost of establishing, staffing and maintaining local plants.

In their rush to get their vehicles on South African roads, international competitors aren't averse to heavily discounting prices. They often sell vehicles close to their cost price and try to recoup profits through the sale of replacement parts.


LOCAL CONTENT DEFINED

The value of all direct local manufacturing costs, including brought-in local components, assemblies and manufacturing services, plus a total of remunerations  of people directly employed in the manufacturing process in any capacity. - Ivan Philip in CommercialTransport.
 

As the motor industry braces itself to try and withstand a ruthless round of price-cutting by foreign competitors, what are expectations in the ...


BUILDING AND CONSTRUCTION INDUSTRY?

Not all that rosy, according to Derrick Theck, group financial director of Blue Circle Limited.

Blue Circle, wholly owned by Murray & Roberts, manufactures and markets a range of basic building and construction materials and products. In the company's sphere are Blue Circle Cement, Ready Mix Materials and D&H Materials.

Price-cutting is always a threat as Blue Circle can neither prevent foreign competition nor meet competitors' price levels without pricing itself out of the market.

The company is particularly wary of the threat posed by the weak rand, which will enable foreign competitors to overcome the industry's high barriers to entry and huge start- up and overhead costs.

Blue Circle identifies dumping as another major threat.  The marginal cost of producing cement is very low in Europe. So in a world trade recession, when transport costs are relatively low, dumping, which forces domestic prices down, is a major threat.

Neither are prices set in concrete in ...


THE BANKING SECTOR

While most banks discount the possibility of a price war, Nedbank doesn't. As divisional director of the Commercial Banking Division Jack de Blanche views the situation in a different light.

'When one looks at the banking world, the price charged is the interest rate charged. Overseas competitors will and are trying to lend money at cheaper rates, playing havoc with pricing structures.'

ABSA puts forward a view held by most of the other banks. It doubts that foreign competitors will attempt to build market share at the expense of sacrificing immediate profits.

'Gone are the days whereby somebody wants to lose money for the glory of having a presence,' says J Runewitsch, the group's executive of corporate and merchant banking.

Does this also apply to the market for ...


PREPARED FOODS?

Overseas chains entering the market will attempt to grab market share on the basis of price.

'We know this,' asserts Joseph Jaffe, of Nando's Chickenland. 'MacDonald's will come in ultra-cheap. Say R1,99 a burger. We can't compete with that.'

But it doesn't worry him.

When MacDonald's enter, they'll service a different segment of the market.

'MacDonald's is very, very fast and our main focus is not on speed. We at Nando's do not regard ourselves as good fast food, but rather as good food fast.'

So MacDonald's, if and when it arrives, will probably hurt businesses such as Steers and Kentucky, which appeal more to the lower and middle income groups.

Achilles Zoulas, marketing manager for the Steers Group of Companies, adds the name Burger King, which falls under Coca-Cola's umbrella.

He reckons that Burger King will probably arrive in South Africa first.

'It has huge financial muscle and may be prepared to run its outlets at a loss for up to 12 months to establish itself in the local market.'


No winners

Does this mean that a bitter price war will tear the fast food sector asunder?

Zoulas doesn't think so. 'A price war is not attractive to any party because there are no winners at the end of it. Price wars create a false demand.

'If a customer is only attracted by price, there is a possibility of losing him when the price goes up again.'

A 1993 survey in the United States found brand switching occurs randomly, depending on which fast food outlet offered the best special at any given time.

And what does the ubiquitous range of Wimpy Restaurants feel about the impending price-cutting invasion, particularly by MacDonald's?

Mafeno Phora, one of the chain's junior brand managers, believes that the American fast food chain will initially set up only one store -  probably in Soweto. This will generate positive publicity for the invader and become a useful testing ground for further expansion.

MacDonald's will use a price war strategy to attract customers initially and 'pump its presence' in South Africa. But the initial rush will taper off when the novelty dies down.

The threat of a price blitz doesn't only apply to restaurants and fast food merchants. It also applies to industrial catering giants like the Fedics Group.

Since the primary objective of overseas competitors will be to build market share, says Don Pigott, they won't be too concerned about short and medium-term profits.

And how will Fedics react? By fighting back on the basis of price.

'However, a price war will lower the base from which profits must grow ... it will lower the invader's ability to become profitable.'

Also set for a shake-up is ...


THE BREWING INDUSTRY

Price-cutting to gain market share is inevitable, says Adrian Botha, public affairs manager of the Beer Division at the South African Breweries.

But he doesn't believe this is the best way of doing it.

 'Consumer perceptions are built on the quality of a brand and often, if you under-price a brand, the immediate reaction is that the product is cheap and of inferior quality.

 'This does not mean that there will not be price-cutting. But it will be minimal as it will damage the product.'

Any offshore brewery contemplating a presence in South Africa will need a lot of money to establish itself. The cost of building a brewery, for example, can top R1-billion. Then there are the millions needed to build brand awareness and loyalty plus the cost of establishing distribution channels.

'If price-cutting does occur,' Botha observes, 'companies will need huge amounts of capital to absorb losses and take on SAB in a price war.'

There's also trepidation in ...


THE PROCESSED FOODS INDUSTRY

But Borden Foods isn't quaking in its corporate shoes. Henk Kleizen, general manager of the Consumer Division, sees little prospect or scope for price-cutting in the short term.

Since Borden, which markets Cremora, Pasta Romana,  Make-a-Litre and Tubs Noodles, doesn't work to excessive margins, there's little room to lower profits.

This is an industry-wide situation. So, if prices drop significantly, many companies will be driven to the wall.

Some companies may be able to finance short-term losses, according to Kleizen. But when they're forced to raise prices in the longer term, they stand to lose newly acquired market share.


The dumping syndrome

The local food industry also faces the threat of dumping, which could shred marketing strategies and seriously dent bottom line results. It's a 'get in' method that's of great concern to African Products.

The company processes maize into starch, glucose syrup and other maize-derived products for the pharmaceutical, confectionery, brewing and food industries.

National sales manager Stewart Krook points out that deregulation will allow African Products to buy maize directly from farmers to drive prices down. But it still won't be able to compete with the price of maize-derived products that are dumped on the local market.

Kellogg's, which holds an estimated 40% of the ready-to- eat breakfast cereal market in South Africa, faces almost certain price-cutting threats if other major international players decide to make a bid for market share.

'Pricing could be one of the most important short-term strategies of a potential entrant,' observes brand manager Grant Leech.

But Kellogg's won't cut prices. The underlying rationale is that price-cutting may lead to changes in consumer perceptions of Kellogg's brands. The customers may start believing that Kellogg's is cutting quality, not just prices, or that Kellogg's has been 'ripping them off' for the past number of years.

Also likely to attract foreign price-cutting competitors are sectors of ...


THE FURNISHING INDUSTRY

Let's consider Cape-based Nettex. It specialises in warp knitting, printing and finishing of 100% polyester fibre curtaining and allied fabrics. And managing director M C van Wyk claims it's the largest operation of its type south of the Equator.

'Foreign competitors are likely to use a variety of tactics in an attempt to increase their proportion of local market share. It's probable that they'll enter the curtaining market with products that are priced significantly lower than those of local producers.'

And he fears that advanced technology will allow competitors from the Far East to operate at a fraction of Nettex's costs.

'Lower costs and higher product quality will definitely erode market share to the detriment of Nettex's profitability and reputation.'

Also in line for foreign competition is ...


THE RETAIL BOOK MARKET

Anthony Ward, a director of The Exclusive Books Group, says big retailers entering the South African market will probably discount heavily in the beginning and then slowly raise prices to increase profits.

How will they minimise start-up costs and cover overheads? By purchasing large warehouses on metropolitan peripheries and fitting them out as a basic stores without elegant shop fittings. They'll then stock these 'barns' with a large range and depth of reading matter and develop them as self-service stores to minimise staffing levels.

Another market heading for a rough ride is ...


THE CAR HIRE INDUSTRY

Major players in international car rentals will break into the South African market by cutting prices. So says Richard McGhee, of Budget Rent A Car.

Possible offshore competitors include Alimo, an aggressively marketed American car rental service, Eurodollar and Euro Car Inter Rent.

Their first task on landing: to capture attention. They'll do it by dragging prices down and simultaneously enhancing levels of service.

Invaders will initially target the leisure market, of which local car rental companies have only a small share. By lowering normal rates available to this segment, Alimo, Eurodollar and Eurocar will try to dominate the market by offering attractive and tempting packages -  ideal for weekend getaways with family and friends.

After establishing a strong foothold by raiding the leisure market, invaders will begin competing head-on with Budget in the corporate market. They'll offer business people rates comparable to those they've established in the leisure market and promote their services on the basis of low rates equal low costs. 

Major price upheavals are also expected in the ...


PHARMACEUTICALS MARKET

A sudden flood of international competition will probably lead to a vicious price war in the pharmaceutical sector, warns R A H Bhikha, managing director of BE-TABS Pharmaceuticals.

He says invaders will be motivated by only two factors:

  • building market share, and

  • making money.

But incoming companies won't be able to depress prices indefinitely. They'll be limited by the amount of financial muscle they possess and the length of time shareholders will allow them to operate without making profits.

Also concerned about pricing are companies involved in manufacturing and marketing ...


HEALTH-CARE, BEAUTY AND CLEANING PRODUCTS

SmithKline Beecham, Unilever SA, Johnson & Johnson, Colgate-Palmolive and Adcock Ingram Consumer Products perceive their main threat to be Proctor & Gamble (P&G).

An analysis by SmithKline Beecham of P&G's entry into Australia shows that the United States-based company moves quickly, bringing in products manufactured overseas at very competitive prices. And it generally launches with tremendous marketing and advertising support.

Patrick van Hoegaerden, of Lever Brothers, has a different perspective. While he acknowledges P&G as a major threat, he doesn't believe they'll cut prices to get into the South African market.

 'From what we know of Proctor & Gamble, they are best at selling products at a premium. So they're most likely to come in from the top end and may even sell their products at a higher price than we sell ours.'


Everyday low pricing

However, all local players expect P&G to implement a brand development plan which evolved from an "Everyday Low Pricing" strategy that attempts to save on retailer trade promotions. This plan - an extension of value-pricing - allows retailers to receive upfront promotional funds based on past performances.

What worries them is P&G's international reputation for deep market penetration and its resolve to stop at nothing to achieve market dominance.

Another sector that expects competition on the basis of price is ...


THE TEXTILE CHEMICAL INDUSTRY

 The CHT Group of Companies expects invaders from the Far East to strike with lower prices, the result of access to cheaper and more productive labour markets, economies of scale production and export subsidies.

 Like the Japanese, the attackers will apply 'a profit- neglecting selling strategy'. This is the low-cost, high volume production of limited production lines that allow the use of price as a major competitive tool for achieving sales growth.

Competitive pricing has always been a problem for ...


THE PAPER PRODUCTS INDUSTRY

 Wayne Scrooby, product manager in charge of coated grades and tissue at Sappi Fine Papers, doesn't try to hide the fact.

 'Pricing has always been a problem for us to due to inefficiencies and high costs. Our prices were originally 20% more expensive than imports.'

 Main culprit: methods of distribution. A customer may choose one of two methods of purchasing. He can:

  • go to a merchant who will place an order with a mill,  receive the paper and deliver it to the customer, or  

  • place an indent order through the merchant, in which  case the mill will deliver the paper directly to the customer.

 The latter system lowers the cost to the customer because the merchant's involvement is only administrative. To counteract this procedure, Sappi introduced its own indent procedure, which leads to significant savings by customers.

 Scrooby identifies his main foreign competitors as Magno Print and Lumi Art in Germany, and Comdat in France.

 'If these or any other competitors attempt to build market share through price-cutting, Sappi will not hesitate to lower prices in response.'

 Not that Sappi wants to engage in a price war.

 Although the company claims it has the financial clout to wipe any single importer or local producer out of the market, Sappi will lose money. In addition, eliminating competition will reduce the customer's choice of paper ranges.


Foes in Finland

 While the South African market, which consumes about 550 000 tons of paper products a year, is small by international standards, it has attracted the interest of Finnish paper producers.

 Fins, Mondi Paper alleges, used price-cutting to wrest a large portion of the South African market from local producers.

 The Fins devalued their currency by 50% over two years while their unions agreed to lower wages. The South African import tariff on paper products and raw materials is currently low by world standards at 10%, so Mondi was afforded little protection from the price-cutting.

Also preparing their defences to counter the offshore threat are companies in ...


THE MANUFACTURING AND ENGINEERING SECTORS

Cullinan Industrial Porcelain (CIP), which manufactures electrical porcelain insulators, has already begun to feel the adverse effects of price-cutting by foreign competitors. Although sales manager Jan Beukes reports a minimal 2% to 3% loss of market share, he expects this to increase.

 'The use of a price penetration strategy by invaders has made it impossible for CIP to compete on price. Our costs are already significantly higher than the international selling price.'

 CIP recently lost a R1-million Eskom contract to an Indian manufacturer on the basis of price.

Another problem: the world market for insulators has been saturated. Consequently many foreign manufactures are dumping their excess stock in South Africa at ridiculously low prices.

So now's the time to ...


REVIEW YOUR PRICING STRATEGY

 You have five options:

  1.  Adopt a 'bugger them' attitude and keep your prices as  they are.

  2.  Slash your prices to undercut the undercutters.

  3.  Adjust your prices downward to meet those of the  competition.

  4.  Increase your prices and target a niche market. 

  5. Cut costs to lower your prices and add value to  customer service.

 Select either of the first two options and you could find yourself in the bankruptcy court.

 Select options three and four and you need the financial clout to outlast the competition.

 Your best bet is option five. It involves using your resources - human and material - more efficiently. It may involve restructuring your organisation from top to bottom. It will certainly involve developing a customer service culture. I go into more detail later.


DOES PRODUCT QUALITY COUNT?

 While low prices may initially attract consumer attention, they don't always lead to ongoing customer loyalty. There are other factors that count. Like the quality of the product and its availability. Both depend on research and development and labour's skills and productivity. Taking these into account, how does South Africa measure up in global terms?

 In many respects, not very well.

Prev   Next

  Authors Note
    Introduction
     
1. Protection Gets the Bullet
     
2. Perceive the Threat
     
3. Define the 'Get In' Strategy
     
4. A Quick Backward Glance-1
     
5. The Importance of Pricing
     
6. Vital Ingredients: Products and Productivity
     
7. Customer Service: On the Backburner
     
8. A Quick Backward Glance-2
     
9. Preventative Strategies: Price and Service Quality
     
10. Preventative Strategies: The Ramparts of Distribution
     
11. Preventative Strategies: Management - to restructure?
     
12. Preventative Strategies: Market Aggressively to Win
     
13. A Quick Backward Glance-3
     
14. In Conclusion
     
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